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Principle of Indemnification – When Can an Estate Trustee Rely Upon?

Introduction

In Santos et al v Coghlan et al, 2023 ONSC 4862[1], the Court agreed with the applicants that estate trustees are entitled to be reimbursed for reasonable expenses during the administration of the Estate without obtaining the beneficiaries’ prior consent or a court order. Nonetheless, the Court found that the applicants should not have used the estate assets to fund the litigation expenses unless it was approved by a Court order or agreed upon in writing by the parties involved in the proceedings. The Court held that litigation expenses were not to be categorized as debts or legal obligations of the Estate.

Law

According to section 23.1 of the Trustee Act, R.S.O. 1990, c. T.23 a trustee is permitted to use trust assets to cover reasonable expenses related to fulfilling the trust’s responsibilities. The right to indemnity encompasses legal expenses.

23.1(1) A trustee who is of the opinion that an expense would be properly incurred in carrying out the trust may,

(a) pay the expense directly from the trust property; or

(b) pay the expense personally and recover a corresponding amount from the trust property.

(2) The Superior Court of Justice may afterwards disallow the payment or recovery if it is of the opinion that the expense was not properly incurred in carrying out the trust.

Background

Hans and Colleen Luettge were married in 1987. From previous marriages, Hans had four children and Colleen had three children. In 2005, they created wills stating that upon either spouse’s death the surviving spouse would inherit the deceased’s estate. And after the surviving spouse passed, the estate was to be equally distributed among their seven children.

Colleen Luettge passed away in 2011, and Hans passed away in May 2021. Only after Hans’ death, Colleen’s children learned that Hans had changed his will and created a new one in 2020. In his 2020 will, he designated his four children as the primary beneficiaries and gave two of Colleen’s children $30,000 each and excluded one from any inheritance.

The Applicants, Hans’ children, initiated an application for a certificate of appointment of estate trustee with a will. The respondents, Colleen’s children, filed a Notice of Objection, claiming Hans lacked the requisite mental capacity to formulate the 2020 will. Although the applicants initially sought to strike the respondent’s objection, they later abandoned their request. On June 16, 2022, the parties obtained an Order for Directions where the issue of costs was deferred.

After, the Respondents presented their motion for directions, seeking two orders: costs related to the applicants’ abandoned application to strike their notice of objection; and, secondly, they sought an order to prevent the applicants from using estate assets to cover their legal expenses.

Issue 1 – Order for Directions from Justice Phillips

On January 27, 2022, the applicants commenced an application where they sought an order to strike the respondents’ Notice of Objection, and a declaration to confirm the validity of Hans’ November 2020 Will. Alternatively, they sought an Order for Directions. A hearing was scheduled for June 14, 2022.

The respondents submitted affidavits showing that Hans’ cognitive capability declined in the years leading up to his passing. On April 25, 2022, the respondents extended a Rule 49 offer where the applicants were allowed to withdraw their request to strike the respondents’ Notice of Objection, and to validate Hans’ 2020 Will, with no cost implications. The offer also outlined if it was accepted after April 28, 2022, the applicants would pay the costs associated with the respondents’ preparation for the hearing scheduled June 14, 2022, on a partial indemnity scale.

On June 14, 2022, the parties appeared before Justice Phillips, and a consent order was issued. The order, among other things, provided that “the remaining relief sought by the Applicants in their Notice of Application is hereby dismissed” and that “the determination of costs relating to this appearance is hereby postponed to a date to be decided upon by any of the parties.”[2] These terms aligned with the respondents’ offer.

Nonetheless, the applicants accepted the offer after the deadline, which gave rise to the respondents’ entitlement to their partial indemnity costs in the amount of $14,000 (all-inclusive), to be paid within 30 days.

Issue 2 – Respondent’s Motion for Further Directions

Pursuant to Justice Phillips’ Order for Directions dated June 14, 2022, the applicants were appointed as Estate Trustee During Litigation under section 28 of the Estates Act, R.S.O. c. E.21[3]. As requested by the Order, the applicants provided a statement of assets and liabilities of the estate. The respondents found that approximately $80,000 had been withdrawn from the Estate for administrative taxes and legal fees.

The court found that the applicants should not have used the estate assets to fund the litigation, since the prior Order for Directions precluded the estate trustees from paying legal fees from the estate funds. The order stated that the estate trustees “may not distribute or disburse any estate assets, unless such distribution is approved under order or agreed upon in writing by the parties involved in this proceeding”.  The Court concluded that the Order for Directions precluded them from paying out litigation fees from the Estate.[4]

The Court also reviewed the number of hours claimed for costs by the respondents and declared them excessive. The Court confirmed that numerous timekeepers suggested redundancy and inefficiency by the respondents. As a result, the Court ordered a cost award in the amount of $19,000 all-inclusive.

Conclusion

As a result, the Court ordered the applicants to pay the respondents’ costs of the hearing before Justice Phillips, fixed in the amount of $14,000 (all-inclusive), to be paid within 30 days.

Ultimately, the Court ruled that the applicants were prohibited from paying any further legal fees in relation to this proceeding out of the Estate, and ordered to reimburse the Estate for any legal fees incurred in this proceeding that have been paid out of the Estate within 45 days of the decision.[5]

As a conclusion, the Court confirmed that the principle of indemnification for an estate trustee is established in case law and codified in statute. However, when a conflict arose between estate trustees involved in litigation and other parties within the litigation, the Court had to maintain a level playing field (in this instance).[6] In the case at bar, the Court maintained equitable conditions for all parties.

I encourage you to further read the article from Professor Albert H. Oosterhoff on our website on “Indemnity of Estate Trustees as Applied in Recent Cases”[7] cited on the case:

https://welpartners.com/resources/WEL_Indemnity_Article_Oosterhoff.pdf

[1] Santos et al v. Coghlan et al, 2023 ONSC 4862 at para 1.

[2] Ibid at para 11

[3] Ibid

[4] Ibid at para 21.

[5] Ibid at para 41.

[6] Ibid at para 34

[7] https://welpartners.com/resources/WEL_Indemnity_Article_Oosterhoff.pdf

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